Indian Oil Corp Begins Hedging

New Delhi, October 27: | Updated: Oct 28 2002, 05:30am hrs
Given the volatilities in the international crude oil market, Indian Oil Corporation (IOC) has begun testing the waters of hedging and risk management activities. Other companies like Reliance Petroleum Corporation (RPL) (now merged with Reliance Industries), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPC) too are understood to have adopted similar.

IOC sources crude from some 40-odd suppliers. The company has been broadbasing its supply line and in eventuality of any supply line being choked, it has sufficient fall back options. IOC had been experimenting in hedging crude against products about six months ago when it bought two cargoes (69,000 tonne each) of crude against HSD prices.

Since then it has about 1,50,000 tonne of crude hedging against HSD price minus $3.5 a barrel. IOC chairman and managing director told newspersons the price of crude would be $6 a barrel less than the prevailing High Speed Diesel (HSD) price.

While IOC is yet to start pure paperless transactions but it has begun to hedge part of its procurements. IOC has recently bought 2,50,000 tonne of crude for lifting anytime upto December 2003 hedging against prevailing diesel prices.

Earlier, IOC had an arrangement with British Petroleum (BP) for jointly handling crude imports. Since then it has parted ways and has instead plans to set up a foreign trade desk in London or Singapore.

Last week, as per sources, IOC has bought a very large crude carrier of Nigerian Bonny Light in its tender for supplies of November sweet crudes. They said the VLCC, which carries about two million barrels of crude, was awarded to a European trader. IOCs tender asked for sweet crudes for November deliveries and requested that offers be priced against Singapore spot gas oil quotes.

While absence of hedging results in refineries buying shorter haul crudes (less time exposure) rather than the best value crude.

Further, the country also pays a higher price for crude oil. Hedging allows the refineries to effectively fix the manufacturing margins resulting in confidence to operate at higher rates and meet cash flow objectives.

Before the hedging process was in place, Indian companies had little bargaining power on Dubai crude since they did not have access to other sources of crude. With the process of hedging, Indian oil companies can now go for Venezuala oil and this has brought in one more player in the market.

The time period between commencement of planning cycle and final price determination can be 120-150 days.

The price of crude oil which is shipped to East from Dubai is higher by around $2 per barrel compared to the supply which is shipped to the West. This is mainly due to the fact that in West Dubai crude is in competition with Norway, Brent, Russian oil and also South American oil.

Thus, hedging enables the oil companies to bring down the price of crude oil by around $1-2 per barrel and also curb risk in the volatile international market.

Some companies even go for 50 per cent contract buying and 50 per cent spot buying. The mix of spot and contract buying also enable the companies to optimise their costs. However, there is a need to access to OTC derivative products besides futures for effective risk management, analysts said.

The Indian refineries buy crude mainly from Middle East where the prices are linked to Dubai benchmark. There is high risk between Dubai and WTI/Brent. With the hedging process, the options have become wider.